AI-Driven Regulatory Compliance: Transforming Financial Oversight through Large Language Models and Automation

Artificial Intelligence (AI) is transforming the landscape of financial regulatory compliance, addressing longstanding challenges associated with manual processes, human error, and the ever-increasing complexity of global regulations. With advancements in AI-driven solutions, financial institutions can now automate intricate compliance tasks, ensuring greater accuracy and operational efficiency. This paper delves into the transformative potential of AI, particularly focusing on the role of Large Language Models (LLMs) in interpreting and implementing complex regulatory frameworks such as Basel III.

Key innovations discussed include real-time transaction monitoring, which enhances the detection and mitigation of fraudulent activities by analyzing vast volumes of transactional data in real-time. Additionally, automated regulatory updates leverage natural language processing to rapidly analyze, interpret, and disseminate new regulatory requirements, ensuring institutions remain compliant with the latest changes. Furthermore, the advent of text-to-code translation enables LLMs to transform verbose regulatory texts into executable compliance rules, reducing the dependency on human coders and minimizing errors. By harnessing these technologies, financial institutions can streamline compliance management, significantly reduce operational costs, and remain agile in adapting to rapidly evolving regulatory landscapes. However, the adoption of AI in regulatory compliance is not without challenges. Issues such as explainability, which ensures transparency in AI-driven decisions, and ethical considerations, including algorithmic bias and fairness, must be addressed. Additionally, the integration complexities of implementing AI systems within legacy infrastructures pose significant hurdles that require careful strategic planning.

This paper provides a comprehensive analysis of AI-driven compliance systems, highlighting their advantages, current limitations, and future prospects. It emphasizes the need for a balanced approach that integrates technological innovation with ethical and regulatory oversight to build robust, transparent, and effective compliance systems for the financial sector.